An extremist, not a fanatic

February 22, 2018

Stable exploitation

Was Kaldor right after all, at least for the UK? This is one question posed by today’s GDP data.

Kaldor proposed as a “stylized fact” that the shares of wages and profits in GDP are roughly stable over time. Today’s figures confirm that this has been the case in the UK, at least in recent years. They show that the share of profits in GDP has been stable at just over 20% since the early 00s. The share of employees’ compensation* has also been quite stable; it fell between 2009 and 2013 which was (arithmetically) the counterpart of higher taxes rather than rising profits.

Yes, we did see a massive shift in incomes from wages to profits between the 70s and mid-90s. But that was partly reversed in the late 90s. Since then, not much has happened to factor shares. This means the wage share is higher now than it was in the 90s and the profit share is lower.

Stock markets tell us a similar story. Since the mid 00s US shares have significantly out-performed UK ones**. There are several possible reasons for this. One is that investors believe that US companies have more monopoly power than UK ones – what Buffett calls economic moats – which means their profits are more sustainable and this justifies higher valuations.

Quite why this should be is another story. One possibility might be that US firms are more intangibles-intensive and hence benefit more from economies of scale than their UK counterparts. As Jonathan Haskel and Stian Westlake have pointed out, intangibles can increase inequality.

Now, in saying all this I am not denying that the UK has a problem with inequality: a stable share of wages in GDP tells us nothing about the distribution of those wages. Nor of course am I denying that British workers are exploited. They are. But in aggregate they seem to be no more so now than in the 90s.

Instead, my point is that in the UK stagnant wages since the mid-00s has had more to do with flat productivity (until very recently) than with employers grabbing a bigger share of the pie. British capitalism is not like American capitalism. Whether this will remain the case is another matter.

* This includes employers’ pension contributions as well as wages.

** My chart compares the FTSE small cap index to the S&P 500 because small caps are a better measure of domestically-based stocks than the All-share index which is dominated by multinationals. Given that the small cap index has out-performed the FTSE 100 since the mid-00s, the UK’s under-performance would look even worse if we took the All-share index.

Comments

In that 1st graph, I do NOT see a stable relationship between Wages & Profits. I see 2-3 separate regimes:

1. Post-war era: union power & relatively paternalistic management give middle classes good wages
2. Reagan/Thatcher/MBA revolution: kill the unions, kill the middle classes, transfer all the money (back?) to the rich.
2a. ...with a (temporary?) bulge in Wages from the Tech Boom/Bubble years 96-00? Or did Clinton do something that GW Bush "fixed"?

Perhaps a longer-term graph (centuries?) would show that the recent regime (concentration of wealth/power) is a return to the historical norm where oligarchs rule until their local system collapses. Whatever - political change (ballots or pitchforks) seems like the only way to revive the middle classes.

Re Luis' "Are Markups Increasing": I'm not buying it.
1. Study ignores FIRE sector, which has tilted Wage/Profit balance just by growing so much.
2. Huge increases in Corp SGA includes CEO pay (including Stock Options?) and other costs which aren't traditionally "variable". Some of the more insidious aspects of the MBA revolution were "small" changes in Cost Accounting techniques. Some of these have nasty macroeconomic results.
Example: Counting Overtime as a Direct Cost of production irrationally overstates the costs of parts worked on Friday-Sunday. OT on Direct Labor was previously - and IMHO, should be - counted as Overhead, a cost of Management's choice to avoid hiring enough people to do the work in 40 hours. The MBA way disguises this choice as an inevitable Direct Cost. (Note: I'm a Computer Programmer with Cost Accounting experience across 30 years in Manufacturing, in USA)

I'm not even convinced that profits are that relevant. What matters is dividends, about £100 bn a year. The other half of profits are reinvested, so benefit future shareholders and employees in same one to six ratio.

Do these calculations of profits include rents? If not they are useless.As the earliest economic radicals, the Physiocrats up to Henry George, established, it doesn't matter how much people receive in wages if the whole lot is subsequently swiped by high rents and mortgage repayments. I fail to see how the present situation for the UK's younger generation can be described as anything other than state-sanctioned torture by rent.